British American Tobacco Expects Impairment Charge Due to Shifting Focus on Smokeless Products

By Joe Hoppe

British American Tobacco (BAT), one of the leading cigarette makers and a member of the FTSE 100, is preparing for a significant impairment charge of $31.5 billion this year. This charge is a result of the pressure faced by some of BAT's traditional cigarette brands in the U.S. as the company continues to prioritize smokeless products.

The macroeconomic challenges faced by BAT's traditional cigarette business in the U.S., along with its investments in noncombustible alternatives, have led to this sizeable noncash adjusting impairment charge of approximately GBP25 billion. The company has highlighted that this adjustment primarily relates to certain acquired U.S. cigarette brands. To accurately assess their value and useful economic lives, BAT will undertake an evaluation over an estimated period of 30 years. Starting from January, the remaining value of BAT's U.S. cigarette brands will be subject to amortization.

Among the brands being written down are Newport, Pall Mall, Camel, and Natural American Spirit. It is important to note that these impairments reflect the shifting market dynamics and industry challenges faced by these specific brands.

BAT attributes the sales decline in the U.S. to various factors, including economic challenges that resulted in customers switching to more affordable nonpremium brands. Additionally, the rise of illegal disposal vapes in the market has contributed to this decline. The company anticipates that these headwinds will continue throughout 2024.

Considering the global tobacco industry as a whole, BAT projects a 3% drop in tobacco volumes for the year 2023.

BAT Targets 50% Revenue from Noncombustibles by 2035, Plans Investments through 2024

British American Tobacco (BAT) has announced its plan to shift its revenue focus, aiming to generate up to 50% of its total revenue from noncombustible products like vapes and tobacco-free nicotine pouches by 2035. To achieve this goal, BAT will continue to invest in the sector until 2024. Alongside this strategy shift, the company also expects to face pressure from the United States.

In the upcoming year, BAT foresees low single-digit growth in revenue and adjusted profit from operations on an organic basis. However, it predicts a gradual improvement that will lead to revenue growth of 3%-5% and mid single-digit adjusted profit from operations by 2026.

Chief Executive Tadeu Marroco expressed confidence in the choices being made, stating, "I am confident that the choices we are making today will drive our long-term success and deliver sustainable value for all of our stakeholders."

For the current year, BAT anticipates revenue growth at the lower end of its previously guided 3%-5% range at constant currency. Additionally, it expects mid single-figure growth in adjusted diluted earnings per share on a constant-currency basis, despite facing a 2% transactional foreign-exchange headwind.

BAT reported strong volume and revenue growth in new product categories, surpassing earlier expectations and achieving breakeven two years ahead of schedule.

At the time of writing, BAT's shares were down by 197.5 pence or 7.9%, trading at 2,290.5 pence.